Global Gas International offers to subcontract the Halidurton Heavy Construction Corporation to build an oil pipeline from Canada to New Orleans for $ 500 million. The probability that the oil pipeline will leak causing environmental damage is θ. If so, the legal liabilities will be $ 600 million.
a. If Halidurton is risk neutral and liable for the damages from a leak, what is the θ such that it is indifferent between accepting or rejecting the contract?
b. If Halidurton is risk averse and fair insurance is offered, how much insurance would it buy?
c. If Global Gas International will partially indemnify Halidurton so that the largest damages that Halidurton would have to pay is $ 200 million, what is the θ that leaves it indifferent about accepting the contract?
d. If partially indemnified, how much fair insurance will Halidurton buy?